A quant expert warns the largest investors are facing a new, post-crisis danger that could lead to several years of losses — and explains how they can start limiting the damage
The problem is that despite this built-in advantage, active fund managers have tended to underweight high-dividend-yield stocks and overweight low-dividend-yield stocks, positioning their portfolios in a manner that does not benefit them, Mezrich said. He illustrated his point with the following chart: He sees this trend potentially crimping performance going forward, and compounding the challenges that the mutual-fund industry is already confronting.
Every year since 2016, more mutual funds have closed shop than have opened, according to data compiled byActive fund managers will likely continue facing headwinds "if America goes the way of Japan, with interest rates drifting towards zero, and if current cost-cutting trends in the financial services industry continue," Mezrich said.Mezrich's first suggestion is that the fund industry stops blaming the wrong culprit for much its underperformance.
Moving forward in a lower-interest-rate world, one way to remedy fund underperformance is to flip the script and gain more portfolio exposure to the high-dividend-yielding stocks they were previously underweight. Mezrich also proposes that fund managers become aware of how low portfolio turnover — the frequency with which stocks are bought and sold — can hurt their performance.
He describes it as avoiding the "momentum trap." When a fund's performance becomes driven by a few outperforming stocks, it inevitably becomes exposed to the downside scenario. We saw this firsthand in September when many of the"Increasing portfolio turnover may be the simplest corrective for this 'momentum trap,'" Mezrich said. "More generally, control of unintended momentum tilts by optimization or momentum factor hedging would help.
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